An Iranian exile shouts slogans to protest against executions in Iran during a demonstration in front of the Iranian embassy in Brussels December 29, 2010.

REUTERS/Francois Lenoir

NEW DELHI, Dec 29 (Reuters) – An oil trading dispute between India and Iran escalated as Tehran refused to sell oil to India under New Delhiâ€™s prohibitive new rules, sources on both sides said on Wednesday.

The Indian sources said officials from the central banks of the two countries will meet on Friday as Iran seeks to rescue trade worth around $12 billion a year, which could be jeopardised by rising U.S. pressure on countries trading with Iran to abandon all dealings.

Last week, the Reserve Bank of India said deals with Iran must be settled outside the Asian Clearing Union (ACU) system, used by central banks of member nations to settle bilateral trades. Analysts predicted talks would be tough and that New Delhi might have to pay a costly bill should it abandon Iranian oil imports.

The Islamic Republic is under global pressure over its nuclear programme, and although United Nations sanctions do not forbid the purchase of Iranian oil, the United States has pressed hard for governments and companies to stop dealing with Tehran.

India is the biggest buyer of Iranian crude among ACU members, with state-owned refiners and privately owned Essar Oil taking around 400,000 barrels per day. Two Indian industry sources said on Wednesday that National Iranian Oil Co (NIOC) turned down Indian oil firmsâ€™ request for payments outside the ACU. The ACU includes the central banks of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka.

â€œIndian firms had asked Iran to immediately nominate a bank in Europe through which payment can be made. But NIOC refused,â€ said one of the sources.

When asked if NIOC was willing to accept any mechanism outside the ACU, a NIOC source said: â€œIt is not acceptable to NIOC as this exercise is in place for so many years.â€ The source added, â€œHow can India unilaterally decide to halt it without any alternative mechanism?â€

Iranâ€™s central bank requested a meeting with its Indian counterpart, the Reserve Bank of India (RBI) said on Wednesday.

â€œThe central bank of Iran has sought a meeting with the RBI,â€ the spokesperson said. â€œNo date has been fixed yet.â€

An oil industry source, who will take part in the meeting, said the discussion between Iranian and Indian central bank officials will take place on Friday in Indiaâ€™s financial capital of Mumbai. He said Indiaâ€™s oil ministry has suggested that RBI stick to the old mechanism of guaranteed payments for oil for now.

Ambika Sharma, Deputy Secretary General at the Federation of Indian Chambers of Commerce and Industry, said: â€œThe two central banks could look at settling the trade transaction in a currency other than the euro and the U.S. dollarâ€

US Pressure

Indian analysts said the oil dispute was due to the pressure from the United States on the international community to stop dealing with Tehran to force the Islamic Republic to abandon its nuclear programme.

Tehran says it pursues only peaceful goals and is not trying to build a nuclear bomb.

â€œItâ€™s basically straight-forward American pressure,â€ said Siddharth Varadarajan, strategic affairs editor at the Hindu newspaper, adding that Chinese and Russia companies could benefit if India ceased to trade with Iran.

U.S. President Barack Obama visited India last month and promised to help New Delhi grow its global role, including by supporting its bid for a permanent U.N. Security Council seat.

â€œIran is already struggling to place their crude in the market, and any stoppage of supply to India will further escalate the problem specially when series of sanctions are imposed on themâ€, said Praveen Kumar, who heads consultancy FACTS Global Energyâ€™s South Asia oil and gas team.

However, India would not want to see ties fray with Tehran, which it sees as an ally in stabilising Afghanistan after U.S. troops leave in 2014. It is also sensitive to internal criticism that the decision was taken due to American pressure.

Sanctions mean Iran will find it tough to find an alternative buyer for oil, its major source of revenue. India faces the prospect of a rising import bill as it seeks to replace Iranian oil, which amounts to nearly 13 percent of its overall crude imports.

â€œIndian refiners will continue to operate their units at high utilisation rates to meet the domestic demand, which means they will have to source crude from alternative avenues,â€ said Kumar.

â€œThis may lead India having to pay a premium for the crude oil it procures.â€